The Los Alamos County Council spent two-and-a-half hours questioning Project Manager Estevan Gonzales, Information Management Manager Laura Gonzales and Broadband Planning Group President Tobey Johnson about their recommendations for a business plan to finance and build a Community Broadband Network.

Arin McKenna

IT Manager Laura Gonzales answers council’s questions about the proposed Community Broadband Network business plan.

Although some councilors acknowledged that CBN would be an important asset to the community they were reluctant to accept the proposed funding option and appeared to be skeptical of the potential for the system’s success during a work session Tuesday in White Rock.

Building the 1Gbps fiber optic network to every home and business in Los Alamos would cost approximately $47.2 million. Consultants also recommend an “equipment refresh” within seven to nine years of operation, with an estimated reinvestment of another $7.6 million. Average annual operating expenses associated with the day-to-day administration, maintenance, support and marketing of the network have been estimated at $2.3 million.

Staff recommended that the initial project cost be financed through a revenue bond issuance that would be repaid over 20 years with a 7/16 Gross Receipts Tax increment. The GRT increment would also help cover operating costs, along with revenues generated by selling wholesale network services to retail providers. Reinvestment costs would be funded by a shorter term revenue bond package, with debt service covered through accumulated cash flows.

Annual revenues comprised of the GRT increment and the wholesale revenues together would result in approximately $6 million to $7 million a year. The operating expenses of $2.3 million a year would result in a positive cash flow on a year-to-year basis with the aggregate reserves ranging between $4 million and $8 million.

The cash flows result in an annual rate of return of approximately three percent, typical for community networks. Commercial build out would require a much higher rate of return for shareholders.

Many of the councilors questions centered on risks to the county. What if the GRT base dropped to the point that there were insufficient revenues to cover expenditures? What if the “take rate” by county residents is lower than expected? What if Comcast or Century Link artificially reduced their rates for lower speed service to undercut providers using the service?

In regard to a reduced GRT base, Deputy County Administrator/Chief Financial Officer Steven Lynne responded, “Unless the drop was catastrophic we’d likely be okay on the debt service side. In terms of the operating expenses, we could use any other county revenue to pay for operations, and it would be kind of a balancing act in terms of what other services the county provides."

Johnson pointed out that projected revenues and “take rates” had been purposefully estimated conservatively to account for risks such as competition from Comcast or Century Link.

His company based their findings on a random telephone survey rather than the self-selecting Internet survey, which suggested much higher support. They then assumed that only half of the 35 percent who said they would very likely take the service would actually do so. They also reduced the number of those who said they were likely to take it (24 percent) or indifferent (16 percent) by 75 percent, or a 10 percent take rate for that segment of the population.
They increase the aggregate of those two figures slightly to 30 percent.

A survey by the Fiber-to-the-Home Council suggests much higher growth potential. In communities with fiber networks available, the take rate increased from just over 20 percent in 2007 to 42.2 percent in 2012. Demand continues to increase as more options for web-based television, high definition movies and “cloud computing” become available.

In a follow-up interview, Laura Gonzales said that Comcast has given no indication of what they would do if this network were to be built. Century Link has made no commitments, but has expressed some interest in a public/private partnership. Further commitments are unlikely until a business plan is solidified.

Councilor Rick Reiss raised concerns that 1Gbps would only be available for the “last mile” in Los Alamos County, and that mid-mile connections off the Hill would be at slower speeds. Laura Gonzales said that REDI-net has up to 2 Gbps available and Century Link is offering between 100 Mbps and 2 Gbps in certain neighborhoods, which means it has that bandwidth to outside networks. The company is not at this point planning a widespread expansion of their service in the county.

Councilors had reservations about financing the network through a GRT increment. Polling showed that 51 percent of residents supported a 5/16 increase, with 29 percent opposing that.

“We would expect a similar level of support with the modest increase to 7/16 percent,” Johnson said.

One councilor asked if Los Alamos National Laboratory had been consulted to determine their support for increased GRT to finance the network, since they would be most affected.

Laura Gonzalez said that the lab has expressed considerable interest in using these services, but no discussions about the increased GRT had taken place to date.

Councilor Pete Sheehey asked staff to develop an alternative option for building the system in increments without the need to finance it through a GRT increment.

Council Chair Geoff Rodgers expressed the most direct support for the project.

“There’s obviously a lot of risk involved if we go down this road. But 20 years down the road, I have to ask myself, what is the risk if this community does not do something like this?” Rodgers said. “Because if we’re not connected to the outside world this community is isolated; and there’s a lot that goes on up here that I think would really benefit from something like this.”

Rodgers directed staff to address council’s reservations by conducting further research on items such as project phasing, public/private partnerships and alternative forms of project financing.

Broadband literally connects our little community to the world, and a very worthwhile investment in my opinion. Internet needs faster and faster speeds as people use it more and more. Our children are information junkies, they have never known a life where they could not get answers at their finger tips, almost immediately. The information highway is essential, it deserves support and funding to expand. I think community broadband would be a great use of our tax dollars and I support it fully.